Abstract: Agriculture is and will remain a key growth driver for Africa. Small and medium sized enterprises (SMEs) are revitalizing Africa’s private sector and should play an increasing role in Africa’s green revolution. Experts cite several reasons for the disconnect between Africa’s agricultural potential and its current state, including macro-level hurdles such as currency risk and market-distorting policies, and micro-level hurdles such as a lack of financing and management expertise, rural location, and lack of political connections. The authors believe that agriculture-focused entrepreneurial management is the primary hurdle, and they propose an innovative model to mitigate this over the short and medium-term.

Introduction

“Seventy percent of employment in Africa comes from agriculture, so you can argue that, in Africa, agriculture and economy are synonymous. In effect, you cannot modernize the economy in Africa without starting with agriculture.” This quote, from Prof. Calestous Juma’s The New Harvest, is yet another reminder of the crucial role that agriculture will play in propelling Africa out of poverty. While the continent has several substantial growth opportunities, few of them compare in scale to the 32% of Africa’s GDP that agriculture represents (World Bank 2011). Fewer still could claim to unlock synergies in both poverty reduction and alleviation of hunger that 239 million Africans live with (FAO 2010). Africa accounts for 60% of the world’s arable, uncultivated land (McKinsey Global Institute 2010). Cereal yields in Africa are currently less than 50% of those in Asia or South America (FAO 2011). Such low productivity overall is largely attributable to the current state of smallholder farming and to the dearth of larger commercial enterprises. The message is clear: Africa must increase its land under production and productivity significantly over the next 20 years to generate economic growth and maintain food security. One of the catalysts to an agricultural revolution in Africa will be a new focus on SMEs in general and on their management specifically.

The focus for generating African agricultural growth: SMEs

Increasing agricultural growth can be achieved through several actors: smallholder farms, SMEs, and large-scale commercial and multinational enterprises.

As the 2010 McKinsey Quarterly article “Africa’s Path to Growth” cited, India and China have similar portions of small farms, but have achieved significantly higher productivity from green revolutions that transformed their agriculture sectors through improved knowledge, seeds, fertilizers and cultivation techniques.

Figure 1: Proportion of smallholder farms, McKinsey Quarterly 2010

High population densities and growth rates served as a primary impetus for the green revolutions across Asia. In Africa, however, lower population densities do not create the same strong incentives for increasing land efficiency to justify productivity-increasing investments such as irrigation. As a result, productivity continues to be driven down by the large portion of smallholder farmers that use poor inputs and traditional farming techniques. Increasing the productivity of African smallholder farming has and should continue to play a vital role in poverty alleviation and self-sufficiency, but the effectiveness of such measures will continue to be stunted by the lack of a structural impetus. However, the success of commercial agricultural ventures is dependent on improved productivity increasing expected financial returns per unit of land to justify up-front investment needed to bring uncultivated land under production. Without a shift to commercial agriculture in uncultivated areas, African agriculture will not reach its potential.

In recent years, major MNCs such as PepsiCo, Heineken, and Nestle have signed agreements with governments to deploy their capital, management, and technical resources to start projects in Africa. These are promising headlines for agriculture and investment in Africa, but the relatively small portion of employment derived from MNCs precludes them from being the “answer” to agricultural growth.

Instead, we argue for a focus on SME commercial agriculture. The May 2009 issue of Proparco’s Magazine on SME Financing in Sub-Saharan Africa found that, “SME profits are not dependent on long production runs and small firms can consequently produce smaller quantities to serve small local markets. The SME sector thus serves as a ‘nursery’ and a proven training ground for ‘higher level’ entrepreneurship and innovation.”

Moreover, data from developed countries shows that high performing SMEs may be the primary generators of new jobs (IFC 2011). Given the agriculture and SME sectors’ large share of employment, this information suggests that enabling high performing agriculture-focused SMEs could unlock tremendous employment generation potential in Africa.

Figure 2: SME share in employment in Africa, Proparco’s Magazine 2009

Positive developments and survey of hurdles to SME growth

There have been several positive developments across sub-Saharan African countries. Over the past ten years, macroeconomic stability, private-sector enabling policies, and investments in infrastructure have improved the operating environment for SMEs in this region. As the McKinsey Global Institute noted in its 2010 publication, “Lions on the move,” macroeconomic stability increased due to the cessation of several previously protracted conflicts, as well as government efforts to lower inflation, trim foreign debts, and shrink budget deficits. Many African governments have “privatized state-owned enterprises, reduced trade barriers, cut corporate taxes, and strengthened regulatory and legal systems.” They have also adopted myriad policies to encourage foreign direct investment, including:

Granting full repatriation rights to foreign investors

Allowing foreign ownership of domestic companies

Exempting capital goods purchases from customs import duties

Providing tax holidays for 5-10 years for export oriented industries

In combination with increased stability across the continent, these policies have resulted in rising foreign direct investment from $9B in 2003 to $62B in 2008, as the McKinsey Global Institute’s research shows below. Current investments in African infrastructure total $72B per year, though continued progress is critical to improve the business environment.

Despite this apparent overall improvement, the same 2009 issue of Proparco’s Magazine cited above finds some micro-level hurdles in the expansion of the SME space, including an inability to access equity or commercial loans at competitive rates, a lack of management to effectively deploy capital, and extraneous factors such as gender discrimination, patronage, and the age of the firm (newer SMEs with no track record receive little to no financing).

However, a survey of Africa-focused funds demonstrates that the inability to access capital is not as significant a hurdle as it was even a few years ago. The Aspen Network of Development Entrepreneurs (ANDE) reported that its members have made over $900M of SME investments since 2009 and that 199 funds targeting emerging markets were in the process of raising $1.5B in 2010 alone. Africa has been the primary focus of these funds, with 43% targeting the region. As the graph below shows, the number of funds targeting SMEs (a classification including small and growing businesses, SGBs) continues to grow.

Figure 4: Number of new SGB investment funds by vintage year, ANDE and Dalberg 2010

An increasing number of SME focused funds have been raised over the last 4 years, many of them specifically targeting the African agriculture sector.

With regard to the final hurdle, we see promise in the types of funds that have been raised over the last several years. These funds, often backed by development agency and bank funding, make decisions based on the merit of the business rather than the gender, location, or political connections of the owner.

The primary hurdle to SME growth in the current context

We believe that the lack of management capacity remains inadequately addressed. Given improvements in macroeconomic conditions, the increasing availability of SME capital, and funds that select investments on the merit of the business, agriculture-focused entrepreneurial management is the missing ingredient to further expanding the agriculture SME sector and therefore, to unlocking Africa’s agricultural potential.

A lack of agricultural entrepreneurship compounded by poor business and technical management decrease expected returns on capital, which leads to low investment; this is a vicious cycle. Below market returns thus push commercial investors to allocate their capital to other sectors, preventing SME-targeted funds from being sustainable.

To be clear, lack of management is not the sole cause of low agricultural productivity and low returns on capital, but it can be a primary driver of improvement. For example, African governments have made progress in improving their agriculture research capabilities and partnering with other countries to leverage their expertise, but incorporating technical know-how from research institutes, agriculture-focused funds, and development agencies requires entrepreneurial managers that can innovatively adapt new findings to their specific circumstances to increase productivity, expected returns, and instill strong investor confidence (thus increasing access to capital).

Governments have begun to focus on management expertise. For example, according to TradeMark Southern Africa, the Agriculture Minister of Mozambique, José Pacheco, has insisted that what Mozambique’s agriculture sector needs is “new technologies and the knowledge of foreign specialists to transform subsistence agriculture into industrial agriculture” – even more so than additional cash investments in the sector. Mozambique has established a program in collaboration with USAID and the Brazilian Cooperation Agency that will help build farmer capabilities and develop agricultural managers that can take advantage of more advanced farming techniques, including less-capital intensive furrow irrigation, optimal use of fertilizer and organic nutrients, and more reliable, cost-effective transport methods. This capability-building program was developed when Brazil asked the question “How can we focus in a more substantive way to really make a difference in Mozambique?” in its multilateral talks with the US and Mozambique. All parties agreed that the priority should be on developing a self-sustaining cadre of agriculture-focused entrepreneurial managers who can incorporate and diffuse farming best practices. (TradeMark South Africa 2011)

A new model

National governments and the development community need to find creative ways to tap into foreign expertise to improve entrepreneurial management capacity. The former has been successfully demonstrated by the Mozambican government, which has embarked capacity-building programs for local managers. For the latter, we propose a Peace-Corps type model that brings foreign agriculture-focused entrepreneurial managers to start and operate businesses on the ground for a period of years with the goal of transitioning operations to the local management that they have developed.

The proposed model is not an ideal or long-term solution; it is a short-term bridge that reflects the current realities on the ground. Some countries, such as Kenya, have succeeded in fostering stronger entrepreneurs while other countries, such as Ethiopia, have deficiencies in entrepreneurial management skills.

This new model requires funds to find trusted, talented individuals that understand the realities of the operating environment, adapt optimal agricultural practices, and rapidly develop the skillsets of local managers. Plainly said, this model requires more “venture capital” and foreign entrepreneurial managers that live and work in-country, often in obscure, uncomfortable circumstances for years, not months or weeks. These agribusiness managers could be analogous to Peace Corps members of the business community that generate sustainable agricultural growth and build up local capabilities.

The development community has come up with other innovative solutions that improve capabilities of managers, but none successfully leverage foreign entrepreneurs that directly manage projects on the ground.

The proposed model does not develop a handful of world class leaders or large businesses that replace billion dollar MNCs; it results in substantial increases in the growth of SME agriculture with the cascade effect of developing talented, local managers equipped with agricultural expertise that can attract capital to start new projects and generate sustainable growth in African agriculture.

Conclusion

Capturing Africa’s agricultural potential requires talented managers and entrepreneurs that can attract capital, apply technical expertise, and reap the economic benefits of using improved inputs to develop profitable SME agribusinesses. Only through a shift in focus to the gritty details of developing a talented African community of entrepreneurs and managers will we be able to substantially accelerate the growth of African agriculture. The private-sector focused development world must respond to this challenge by re-allocating its resources to identifying agribusiness opportunities and building teams capable of executing them to generate market returns – either through building up fund’s internal competencies or filling the gap with agriculture-focused entrepreneurial management firms.

This shift would result in building local businesses and managers that accelerate economic development in Africa. The only African investment fund in the Global Impact Investing Network states that it “is committed to driving the continent’s economic growth from within by proving the African private sector can itself be the primary generator of economic development.” Those of us in the development community can be a positive force in making this a reality by using our resources to build the capabilities of the African SME agriculture sector to generate economic growth and perhaps prevent a global food crisis.

Author biographies:

Joseph Shields is a managing partner at Flow Equity, an entrepreneurial group that builds and manages agribusinesses in Ethiopia. Prior to this, Joseph was a Private Equity Specialist at McKinsey & Company. Joseph has also worked for M.I.T.’s Abdul Latif Jameel Poverty Action Lab in India and consulted for AgDevCo.

Jonathan Elist is a joint MPA/MBA candidate at the Harvard Kennedy School and Stanford Graduate School of Business. Prior to this, he was a Junior Engagement Manager at McKinsey & Company. Jonathan has worked with the Gores Group, an LA-based private equity fund, and with Endeavor Argentina, supporting entrepreneurs.